A credit score is a number calculated based on several factors, such as payment history, credit utilization, credit history length, credit mix, and new credit inquiries. Of these, payment history and credit utilization have the greatest influence.
Credit bureaus and scoring models assign different weights to these factors, resulting in different credit scores. Knowing how each factor affects your score can assist you in making more informed financial decisions.
What is a Credit Score?
A credit score is a 3-digit numerical score that is assigned to someone’s creditworthiness. It usually exists between a range of 300 to 850. The credit score serves as a lending tool for lenders to evaluate your payment capacity. Banking institutions use credit scores to make decisions about loan qualifications alongside interest rates and credit card allowances.
What is Considered a Good Credit Score?
Credit scores can be fair, good, excellent, or poor based on the range of 300 to 850, with higher scores reflecting greater creditworthiness.
Various lenders might have different standards, but here’s a general outline:
Credit Score Range Explained
| Score Range | Value | Significance |
|---|---|---|
| 750 – 850 | Excellent | Easiest approval, best interest rates, and higher credit limits. |
| 700 – 749 | Very Good | Strong approval chances and competitive interest rates. |
| 650 – 699 | Good | Moderate approval odds, higher interest rates, limited options. |
| 600 – 649 | Fair | Harder approval, high interest rates, lower credit limits. |
| 300 – 599 | Poor | Significant credit risk, very limited loan options. |
Having a score above 700 can ensure better financial prospects, like:
Importance of a Good Credit Score
Having a good credit score creates financial stability because it enables you to receive better financial offers.
Here’s why:
- Loan Application Success: A strong credit score leads directly to more successful loan applications, including requests for credit cards, home loans, and mortgages.
- Low Bank Rates: The bank rates for borrowers with good credit scores lower their overall financing expenses because of their better credit quality.
- Higher Credit Limits: Lenders offer higher credit limits to those with strong credit histories.
- Reduced Insurance Rates: Insurance companies provide an opportunity to secure insurance rates that are reduced from the standard premium amounts only for individuals with favorable credit scores.
- Better Job Opportunities: Certain job positions need a credit check before employment as a requirement for financial accountability.
The 6 Key Factors That Shape Your Credit Score
Your credit score is based on various factors, each weighing differently into your composite score. Credit bureaus utilize these factors to evaluate your creditworthiness, determining loan approval, interest rates, and access to financial opportunities.
There are three large credit bureaus in the U.S.:
- Experian
- Equifax
- TransUnion
All of them are focused on collecting and reviewing your credit information. Though they have marginally different models of scoring, the underlying determinants of your credit score are the same in all three. These determinants reflect your payment habits and allow lenders to estimate the risk of lending to you.
This can be understood from the below table:
Credit Score Influencing Factors and Their Weightage
| Credit Score Factor | Description | Significance | Weightage Experian | Weightage Equifax | Weightage TransUnion | Influencing Strength |
|---|---|---|---|---|---|---|
| Payment History | Records of on-time, late, and missed payments | The most crucial factor that impacts lender trust | 35% | 35% | 40% | Very High |
| Credit Utilization | The ratio of used credit to total available credit | Keeping utilization low improves scores | – | – | 20% | Moderate |
| Available Credit | Unused credit limit across all accounts | Indicates financial flexibility and low dependency on credit | 30% | 30% | 3% | Moderate |
| Total Balances & Debt | Total outstanding debt across all accounts | High balances indicate risk to lenders | – | – | 11% | Moderate |
| Length of Credit History | How long accounts have been open | Longer history builds trust with lenders | 15% | 8% | 21% | High |
| Credit Mix | Variety of credit types (loans, credit cards, mortgages) | A diverse mix shows responsible credit use | 10% | 15% | – | Low |
| New Credit | Recently opened accounts and hard inquiries | Too many new accounts can lower scores | 10% | 12% | 5% | Moderate |
Factor 1: Payment History
Payment history stands as the leading factor that determines your credit score because it constitutes a major part of it. The credit report includes precise documentation for payments made on time, as well as any late payments, defaults, and bankruptcies. Lenders develop trust with borrowers who demonstrate regular and timely bill payments throughout the period.
| Actionable Tip: You should pay your minimum balance in full on time since this protects your credit score from adverse consequences. |
Factor 2: Credit Utilization
Your credit performance depends heavily on the ratio between your actual credit spending and the total credit pool. To obtain a high credit score, maintain your credit utilization ratio at 30% or lower. When you exceed 30 % of your available credit, your financial condition appears strained to lenders, therefore diminishing your credit score.
| Actionable Tip: To lower your credit utilization, you should seek an elevated credit limit or pay your debts before their due dates. |
Factor 3: Length of Credit History
Your credit age/length of credit directly affects your credit score ratings. The length of time that someone maintains stable credit functions as an essential factor lenders use to determine borrower credibility. Your credit score gets negatively affected when you close old credit accounts because this action makes your credit history shorter.
| Actionable Tip: The best practice is to keep all your accounts with established credit standing active even when they are unused. |
Factor 4: Available Credit
A large amount of available credit lets the lender believe you do not heavily depend on borrowing funds. A higher limit and lower percentage of used credit leads to better score points.
| Actionable Tip: The practice of maintaining multiple credit accounts will improve the amount of credit available to you. |
Factor 5: Credit Mix
A mixture of different credit accounts, including credit cards, auto loans, and mortgages, proves that you manage diverse debt with responsibility. Multiple credit accounts help increase your score positively.
| Actionable Tip: If you have no credit cards, add an installment loan to make your credit mix more diversified. |
Factor 6: New Credit & Hard Inquiries
Every time you apply for new credit, the lender makes a hard inquiry that temporarily reduces your score. Lenders interpret frequent inquiries over a short period as financial distress.
| Actionable Tip: Spaced out the applications for credit to reduce harmful effects. |
FICO vs. Vantage
FICO Score and VantageScore are the two dominant credit scoring models. Both rely on the same factors but vary in weight. FICO is used more prevalently by lenders, while VantageScore takes into account trends such as trended credit data.
FICO vs. Vantage: Factor Weightage Difference
| Factor | FICO Score Weightage | VantageScore Weightage |
|---|---|---|
| Payment History | 35% | 40% |
| Credit Utilization | 30% | 20% |
| Available Credit | 3% | |
| Total Balances & Debt | 11% | |
| Length of Credit History | 15% | 21% |
| Credit Mix | 10% | |
| New Credit | 10% | 5% |
What Doesn’t Affect Your Credit Score?
There are many myths surrounding the things that can and cannot affect your credit score. Most people think that their income, job status, or bank account balance affects their credit score, but it doesn’t. Credit scores are determined by how you pay your debt, not what you earn or save. Though payment history, credit utilization, and credit mix are important factors, some aspects of finance have no bearing on your score.
Misconceptions about credit scores can cause unnecessary anxiety and bad financial decisions. For instance, some believe that checking your credit score will decrease it.
Some common credit social myths are:
- Your job or income influences your credit score.
- Closing out old accounts enhances your score.
- Paying on a credit card balance increases your credit.
- Your bank balance will affect your credit score.
- Checking up your credit score decreases it.
Knowledge of these myths can assist you in concentrating on the actual determinants that influence your score. For more about these myths and their explanations, read our in-depth guide: [Credit Score Myths Debunked].
Conclusion
Your credit score is an important money metric that determines loan approval, interest rates, and overall credit rating. It is influenced by six primary factors, with payment history and utilization of credit carrying the most weight.
Although FICO and VantageScore share the same criteria, they assign factor weights differently, resulting in minor score differences between models. Because Experian, Equifax, and TransUnion evaluate credit information differently, keeping tabs on your credit report is important.
To keep a high score, make bill payments on time, have low credit usage, and have a varied mixture of credit. Avoid too many applications for credit and review your report for inaccuracies frequently. By controlling these variables well, you can improve your financial well-being and enjoy better terms for borrowing down the road. Take charge of your credit today!
FAQs
What factor has the best impact on a credit score?
Your payment history stands as the main credit score determinant because it contributes 35% to 41% of your total score. Your credit score experiences a substantial decrease when you make late payments.
Is 5 years of credit history good?
A 5-year credit history counts as sufficient, but an established credit history of 7- 10 years will lead to a higher score potential. Active older accounts help shape a reliable credit profile.
Can I reset my credit score?
No, you cannot reset your credit score. However, regular bill payments on time, debt reduction, and proper credit management are the main ways to boost your credit score. Negative marks will fade over time.
How to increase your credit score?
The best approach to boost your credit score includes reducing existing debt through payments and maintaining low credit utilization. Being punctual with your payments and resisting the temptation to submit multiple loan applications simultaneously will further help with your credit score.
Does checking my credit score lower it?
The process of viewing your credit score through personal credit reporting results in no negative impact because soft inquiries do not affect scores. Credit inquiries that come from lenders constitute the sole factors that will impact your credit score.